Tuesday, September 20, 2005

New "Lemons" ?

Let me start out by saying that I found readings for this week to be quite insightful However, I had a few concerns with regards to the "Market for Lemons" article. Near the outset of this paper, the author, while distinguishing the "used" and "new" car markets, seems to treat both as equal in the subsequent analysis. The statement that struck me the most was the one referring to "lemons" both in the new and used car market. Personally, I have never heard anyone speaking of "lemons" in the new car market. Isn't that the whole point of buying a new car? When buying a new car, the consumer is guaranteed a fully functioning vehicle (i.e. a non-lemon or call it any other fruit/vegetable of your liking). If, God forbid, the car does show any severe problems, you can take it right back to the dealer and get it fixed/replaced under warranty. If the car's performance starts to deteriorate in 5,6 or 10 years, that's just normal wear and tear and , therefore, you cant call it a lemon. A Mercedes might last longer than a Daihatsu under similar conditions. That's a fact of life: you get what you paid for (usually).

So what's the point of all this semi-ranting? My point is, I believe "lemon" is a term the should only be used when referring to "bad quality" cars in the used market. And that's where the whole "lemon" problem arises. Its because, as the author states, you cannot tell if the car you are about to purchase is a lemon or not. In addition, there is usually no guarantee in the used market that your car will be functioning properly a few months(days?) after purchase, which exacerbates the issue.

Another point I wanted to make was that I believe consumers today are much more aware of the market due to new technologies (such as the Internet), making it very easy for them to research the car they want to buy (and the company/used car dealer). We have to keep in mind that the paper was written in 1970's, long before the commercialization and widespread availability of the Internet. Also, consumers tend to be more demanding these days. There is a growing market for "certified" used cars that offers a guarantee for quality, much like when buying a brand new car. Of course, this comes at a higher price. But it is definitely one way to avoid being fooled into buying a "lemon". By the way, does anyone know why they call it a "lemon"? Just curious.


Blogger ross said...

I've definitely heard the term 'lemons' applied to new cars - being the cars you buy new which have a ridiculously high rate of trouble. You might buy a car which has to go in for service a dozen times in its first year...

However I agree they didn't really discuss the analogy for new cars... I guess they just assumed that you can get a 'lemon' new car but that the probability is very low and no one knows it is a lemon, so it's not an issue of deception as much as of lack of information across the board.

OK, class starting now, I'll maybe think more here if we don't discuss this in class...

1:08 PM  
Blogger Paul Duguid said...

I suspect (though haven't checked, which could mean I end up looking a right lemon) that the term may come from expecting something sweet but finding a sour taste. A search in newspapers c. 1900 might help to prove me wrong.

The OED citations suggest a lemon is something bad, though not necessarily something second hand. It was not reserved for cars. (Wikipedia confidently asserts that "A Lemon is a defective car.")

The OED does, though, note that the term came to be used by people in the car trade to refer specifically to second-hand cars:

1931 Morning Post 19 June 6 ‘I sold five lemons for £210,’ said a witness... ‘Lemon’ was a term used in the trade for second-hand cars of little value.

But the term is not reserved for those alone. "Lemon laws" (eg, California's) are in fact designed to deal primarily with new goods--and not only cars.

The reason Akerlof discusses second-hand cars (as I suggested, Stigler misses Akerlof's point and so looks a little lemonish for chosing this market) is that in the used-car market, buyers have trouble uncovering the history of the car and so of estimating its quality.

8:21 PM  

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